Australian oil & gas M&A activity likely to continue on back of crude price collapse

Jan 29, 2015

A leading Australian energy industry analyst has suggested that M&A activity will continue to growth in Australia on the back of the current crash in global crude oil prices.

Peter Strachan of StockAnalysis says a number of junior Australian oil and companies are already faced with capital raising difficulties because of a decline in equity markets, and that a number of them will need to consider friendly mergers to survive.

“M&A has begun to be a feature. There are far too many ASX listed small oil and gas companies that are not able to fund or manage development.

“A number of oil companies will need to conserve the most valuable asset they have, cash! And a merger is one strategy. I believe there will be more mergers like MetgasCo and Elk to consolidate good assets, management and cash,” Strachan says.

While spending on new oil exploration and development projects in Australia will be severely affected by the current low price environment, Strachan believes the domestic gas market will fare much better because of a forecast growth in demand across the country.

“Domestic gas projects should see strong local prices and the outlook may be less affected. However, projects that are in the wings for development will be shelved, largely because they will not be able to attract debt or equity support.”

According to Strachan it is that difficulty in obtaining capital that is as much an issue for the local oil and gas sector as the fall in oil prices.

“The biggest impediment for growth in the Australian oil and gas industry remains cautious capital with a capital strike affecting exploration and development, behind that is an underlying lack of financial success shown by the capital intensive industry.”

Asked whether the current back of drilling and seismic fleets will eventually lead to a lower costs and a resurgence in local exploration activity, Strachan says that many companies will still be handcuffed by a lack of capital

“Costs are falling for sure and those with cash and projects to drill will be able to take advantage, but the reason that prices are falling is because activity is weak. What we will see in a two to three year timeframe is a serious shortage of oil as project development is delayed.”

Strachan is forecasting that US oil production will decline rapidly this year and that oil will reach a price of around US$90 per barrel by early 2016, which will be needed to meet production costs.

“Exogenous outages of supply are likely to restrict supply and the current low price will see US production decline by mid-2015.

“In the longer term, all up costs of production for US shale oil is around US$70/bbl, after modest dividend payment, so a price of US$90 will be required to provide sufficient return to attract investment. OPEC nations need +US$90/bbl to keep budgets in balance,” Strachan suggested.

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